Refinance Home Mortgage With 2-Step Process
With mortgage rates again heading into the basement, homeowners would be wise to take a hard look at their loans and consider a refinance.
Rates for 30-year fixed-rate mortgages are now approaching generational lows, which may provide millions of homeowners the ability to cut their monthly payments and their long-term costs by thousands of dollars, notes Keith Gumbinger, analyst at HSH Associates, a Butler, N.J., rate tracking firm.
To be specific, a year ago this month, 30-year fixed-rate loans were going for 9.15% on average. Today, they’re at about 7.30%. That means that a person with a $200,000 mortgage could cut their required monthly payments by about $260 per month--to $1,371.14 from $1630.88. Those with smaller loans, obviously, save less. On a $150,000 mortgage, you’d save about $195 per month--$2,338 per year--at these rates.
However, those who want to save the most, should consider making refinancing a two-step process. Get a lower rate and a lower required monthly payment, but continue to pay as much as you did before. Follow that process for a few years, and you’ll pay off your loan in record time and save literally thousands of dollars in the process.
Consider a hypothetical homeowner, who we’ll call John.
John bought his home last February and has the previously mentioned 9.15% 30-year fixed-rate mortgage of $200,000. He refinances to get the 7.3% loan and pays $4,000 in points and fees. Since he doesn’t have $4,000 in cash, he adds that amount onto the balance of his loan, borrowing a total of $203,000. (He’d paid off about $1,000 of the principal over the past year.)
He refinances the loan and his required monthly payments drop to $1,391.71. (He pays about $20 a month to pay off the points and fees over time.) But, since John is used to making monthly payments of $1,630, he decides to continue paying the larger amount.
What does that do for him? It allows him to pay off his loan in 19 years, instead of 30. In the process he saves an astounding $206,469.41 in interest on his $200,000 loan.
To be specific, had John kept his original loan, he would have paid a total of $587,116.80 in principal and interest over the 30-year period. If he refinanced and made only the minimum monthly payments, he would have paid a total of $501,015.24--about $86,000 less. However, when he lowered the rate and continued to make the higher payments, he paid off the principal faster, reducing the balance for calculating interest charges. The result is an exponential hike in the amount saved.
In theory, at least, John could save even more by getting a 15-year mortgage. These shorter-term mortgages usually are offered at slightly lower interest rates. For instance, Countrywide Mortgage was recently charging 7.25%, plus one-quarter point in fees, for 30-year fixed-rate loans, but the company offered 15-year loans for 6.875% plus a quarter point.
However, because these loans are amortized over a far shorter period, the required monthly payments are significantly higher. Even at 6.875%, for example, the payment on a $200,000 mortgage would amount to $1,783.71. If John wasn’t sure he could pay that extra amount every month for the next 15 years, he’d be risking his house by choosing a 15-year mortgage.
In other words, even though the interest rate is a little higher, he buys himself more flexibility and security by sticking with the 30-year term.
What happens if you can’t refinance because your house has declined in value? You can still save a fortune by simply paying a little bit extra against the loan each and every month.
Consider John’s sister, Sue. She bought a home for for $120,000, putting $20,000 down and borrowing $100,000. But, since then the real estate market went south, and Sue’s house appraises at barely $100,000--the loan amount. Her banker scoffs when she asks about refinancing the loan for a lower rate.
Sue decides to simply round up her monthly payment to $850 per month from the required $814. That allows her to pay off the loan in 24 years instead of 30, which saves her $39,153.40 in interest payments.
Moreover, by paying off the principal faster, she also puts herself in a better position in the future. If the opportunity to refinance comes along a few years hence--and real estate prices don’t fall further--Sue will probably be able to take advantage of it.
Kathy M. Kristof welcomes your comments and suggestions for columns but regrets that she cannot respond individually to letters and phone calls. You can message kristof@news.latimes.com on the Internet.
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How Much?
How much would your payments be if you refinanced? Here are the monthly payments for a $100,000 mortgage at various interest rates for a 30-year loan:
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Interest rate Payment 6.50% $632.07 6.75 648.60 7.00 665.30 7.25 682.18 7.50 699.21 7.75 716.41 8.00 733.76 8.25 751.27 8.50 769.91 8.75 786.70 9.00 804.62
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If your loan is larger, multiply the number by the percentage difference between the sample loan and your loan. For example, if you have a $125,000 loan, you would multiply these numbers by 125%, or 1.25, to get your monthly payment. If your loan was $300,000, you would multiply by 300%, or 3.
